Margins and More: Who Can Actually Make Money from 7-inch Tablets?

Ben Bajarin is a principal at Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley. He contributes to the “Big Picture” opinion column that appears every Monday on Techland.

With all the talk around 7-inch tablets lately, I thought it would be interesting to take a look at who actually stands a chance at making money from these devices. This is going to be a tricky segment because it will largely be driven by cost, but those who can tightly tie these devices to services and commerce stand the best chance to succeed.

The Market Opportunity

If you’re a regular reader of my column you will know that I am quite bullish on tablet devices and I write constantly about their role in the personal computing era. Yet, due to recent events, we must now pause and make a distinction around tablet form factors.

When the iPad was first gaining momentum, I heavily advocated that my analyst colleagues not use the term media tablet to describe it. I was, and still am, convinced that tablets are fully functional computers that sufficiently meet the needs of many as personal computing devices. Yet with the recent growth of a 7-inch tablet market, we must now make the distinction between media tablets and general purpose tablets like the iPad.

From my perspective, we should look at 7-inch tablets purely as media devices. In this view, the 7-inch form factor will excel primarily as a portable entertainment device primarily. This is not to say that it isn’t capable of other things, but rather that the main value proposition and the job consumers will hire these products to do will be largely based around entertainment.

This is why the most successful media tablet to date, the Kindle Fire, is positioned around portable entertainment. Google’s Nexus 7 is similarly positioned as a pure media tablet. And if Apple does make a 7.85-inch iPad, as rumored, it should be viewed as the evolution of the iPod — not the evolution of the iPad.

The 7-inch tablets and their focus on media and entertainment will mean that they remain companion media devices. They can be either companions to a cloud ecosystem like in Amazon and Google’s case, or as a part of an entire personal computing ecosystem in Apple’s case.

Who Can Make Money

Having just outlined the role that 7-inch tablets will play in the market, the question now turns to who can actually make money. If you think about these devices, they’re being sold at extremely affordable price points that will push the price barrier.

Many suppliers in the supply chain I have spoken with say it’s accepted that both the Kindle Fire and the Nexus 7 are being sold at slightly below the cost to manufacture. That means that any company looking to sell a 7-inch tablet for around the $200 price is going to have to do so with razor thin margins, if any at all.

Amazon and Google can breathe slightly easier under this pricing model because they can tie these devices to their commerce ecosystems and drive revenue in other ways. The same can’t be said for many OEMs (original equipment manufacturers) who may make a go at 7-inch tablets.

Apple is also in a strong position due to its commerce and services ecosystem. Because of its aggressive spending to lock up cost reduction in the supply chain, Apple may be in a position to make decent margins selling a 7.85-inch tablet — but it may be the only company that’s able to do so. For everyone else, margins will be razor thin to non-existent.

With such razor thin margins, it’s hard to imagine how these devices can show up in retail and still be aggressive in the $200 price range, at least in the short term. This will be another point which may keep companies other than Google, Amazon and Apple from trying to compete in this segment. Unlike smartphones, there may be little to no opportunity for carrier subsidization in this form factor. That’s primarily because the first few generations of devices will most likely be Wi-Fi only in an effort to keep costs down. This may change over time if carriers can be aggressive with family data plans or other pay-as-you-go models.

From where I sit, Amazon, Google, and Apple are in the best position to make money from this segment. How much is up for debate, but because these three companies each have a media ecosystem and commerce engine to leverage, they’re in the best position.

Other companies who plan to enter the space will need to figure out how to tie 7-inch media tablets into their broader hardware, software and services ecosystem. Perhaps companies like HP, Acer, Lenovo, and others can create media tablets as accessories to other computing products in their portfolios.

At a high level, I believe the market for 7-inch media tablets will be very similar to the iPod market in its heyday. History shows us how difficult it was for many companies to try to compete in the iPod market. We will soon see if the 7-inch tablet market has room for many players or just a few.

Ben Bajarin is a principal at Creative Strategies Inc., a technology industry analysis and market intelligence firm in Silicon Valley. He contributes to the “Big Picture” opinion column that appears every Monday on Techland.